An Australian importing company need to pay 3.5m USD in two years’ time for ordered purchases.
The current spot rate is AUD / USD 0.6413 / 0.6479 . Australian interest rates are currently at 4.35%
p . a . and U .S . interest rates are at 5.5% p . a . The net interest rate spread in both countries is
1.75% (read this as the borrowing rates are 1.75% higher than the given investment rates above).
Design a money market hedge which will remove the FX risk faced by the company, yet not
altering the timing of the payment. Clearly show the AUD cash flow in the future.